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Hi, in the situation where there is a Qualified Audit opinion issued as a result of a non pervasive material misstatement, why would it have gone this far, would the auditor not have asked the management to correct this error in the accounts and issue a clean, unmodified report. If the management had refused to restate the error, should we issue an adverse audit opinion instead of a qualified one?
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Your first question absolutely “hits the nail on the head”. If the auditor is of the opinion that there is one or more material but not pervasive misstatement(s), the auditor would discuss with management/communicate with TCWG for the matter to be resolved – either by the client adjusting the financial statements by “enough” (so any residual uncorrected misstatement is immaterial) or the auditor obtaining further audit evidence to change their opinion (i.e. concurring with management).
Your second question is contradictory – “pervasive” has a particular meaning. By definition, management’s refusal to make allowance for a credit loss (receivables), say, cannot affect the opinion on the financial statements “as a whole”.
Let me elaborate … the vast majority of audit opinions are unmodified.
In the case of material misstatement due to “disagreement”, the fact that the auditor is required to report this in the auditor’s report (with sufficient details in the basis of the opinion that the users are informed what is the impact on the financial statements) should deter management from preparing financial statements with material misstatements/persuade them to adjust the financial when asked by the auditor.
However, if the auditor is unable obtain sufficient appropriate evidence about something (e.g. existence or valuation of an overseas asset) – i.e. “limitation in scope” – this is only potential misstatement – the auditor cannot say whether or not it is misstated. Assuming that management has no more evidence than the auditor, by how much are they supposed to adjust the financial statements. I hope you can see that this reason for a qualified opinion is more likely in the real world.
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